N. Gregory Mankiw N. Gregory Mankiw
PowerPoint
PowerPoint®®Slides by Ron CronovichSlides by Ron Cronovich Modified by the instructor
Modified by the instructor
MACROECONOMICS MACROECONOMICS
2011/12/13
Topic 4
Unemployment
(Chapter 6)
Instructor: Tuan Khai Vu
ICU, Winter Term 2011
Principles of Macroeconomics
Learning objectives
Learning objectives
In this chapter, we will learn about the natural rate of unemployment:
what it means
what causes it
understanding its behavior in the real worldNatural rate of unemployment
Natural rate of unemployment:The average rate of unemployment around which the economy fluctuates.
In a recession, the actual unemployment rate rises above the natural rate.
In a boom, the actual unemployment rate falls below the natural rate.Actual and natural rates of unemployment
in the U.S., 1960- 2009
Percent of labor force
Unemployment rate
Natural rate of unemployment
A first model of the natural rate
Notation:
L = # of workers in labor force E = # of employed workers
U = # of unemployed
U/L = unemployment rate
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Assumptions:
1. L is exogenously fixed. 2. During any given month,
s = rate of job separations, the fraction of employed
workers that become
separated from their jobs f = rate of job finding, fraction of unemployed workers that find jobs s and f are exogenous
= # workers separated
# workers employed (E) s
= # workers finding jobs
# workers employedun (U) f
The transitions betw een employment
and unemployment
s ×E # workers separated
Unemployed Employed
f ×U
# workers finding jobs
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The steady state condition
Definition: the labor market is insteady state, or long-run equilibrium, if the unemployment rate is constant.
The steady-state condition is:s × E = f × U
# of employed people who lose or leave their jobs
# of unemployed people who find jobs
Finding the “equilibrium” U rate
f ×U = s×E
= s×(L – U )
= s×L – s×U Solve for U/L:
(f + s)×U = s×L so,
Recall from Ch. 2 (top. 2, sl.48)
E + U = L
the equilibrium unemployment rate depends on the rate of job separations (s) and the rate of job finding (f)
10
Example:
Each month,
1% of employed workers lose their jobs (s = 0.01)
19% of unemployed workers find jobs (f = 0.19)
Find the natural rate of unemployment:Policy implication
A policy will reduce the natural rate ofunemployment only if it lowers s or increases f.
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Why is there unemployment?
If job finding were instantaneous (f = 1),then all spells of unemployment would be brief, and the natural rate would be near zero.
There are two reasons why f < 1: 1. job search2. wage rigidity
Job search & frictional unemployment
frictional unemployment: unemployment caused by the time it takes workers to search for a job
occurs even when wages are flexible and there are enough jobs to go around
occurs because
workers have different abilities, preferences
jobs have different skill requirements
geographic mobility of workers not instantaneous
flow of information about vacancies and job candidates is imperfect14
Sectoral shifts
def: Changes in the composition of demand among industries or regions.
example: Technological change more jobs repairing computers, fewer jobs repairing typewriters
example: A new international trade agreement labor demand increases in export sectors,decreases in import-competing sectors
These scenarios result in frictional unemploymentCASE STUDY:
Structural change over the long run
4.2%
28.0% 9.9%
57.9%
Agriculture Manufacturing Other industry Services
1960
76.5%
8.5%
13.9%
1.1%
2006
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More examples of sectoral shifts
Industrial revolution (1800s):agriculture declines, manufacturing soars
Energy crisis (1970s):demand shifts from larger cars to smaller ones
Health care spending as % of GDP: 1960: 5.2% 2000: 13.8% 1980: 9.1% 2007: 16.2%In a dynamic economy like the U.S., smaller sectoral shifts occur frequently, contributing to frictional unemployment.
In a dynamic economy like the U.S., smaller sectoral shifts occur frequently, contributing to frictional unemployment.
Public policy and job search
Government programs affecting unemployment include:
Government employment agenciesdisseminate info about job openings to better match workers & jobs.
Public job training programshelp workers displaced from declining
industries get skills needed for jobs in growing industries.
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Unemployment insurance ( UI )
UI pays part of a worker’s former wages for a limited time after losing his/her job.
UI increases search unemployment, because it reduces
the opportunity cost of being unemployed
the urgency of finding work
f
Studies: The longer a worker is eligible for UI, the longer the duration of the average spell of unemployment.Benefits of UI
By allowing workers more time to search, UI may lead to better matches between jobs and workers,which would lead to greater productivity and higher incomes.
20
Why is there unemployment?
The natural rate of unemployment:
Two reasons why f < 1:1. job search
2. wage rigidity
DONE
9
Next ÎUnemployment from real w age rigidity
Labor Real
wage
Supply
Demand Unemployment
Rigid real wage
Amount of labor willing to work Amount of
labor hired If real wage is
stuck above its equilibrium level, then
there aren’t enough jobs to go around.
equilibrium that would
occur if…
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Unemployment from real w age rigidity
If real wage is stuck above its equilibrium level, then
there aren’t enough jobs to go around.
Then, firms must ration the scarce jobs among workers. Then, firms must ration the scarce jobs among workers.
Structural unemployment: The unemployment resulting from real wage rigidity and job rationing.
Structural unemployment: The unemployment resulting from real wage rigidity and job rationing.
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R e a s o n s f o r w a g e r ig id it y
1.Minimum wage laws 2.Labor unions 3.Efficiency wages We will see each of these in more detail below…24
1. The minimum w age
The minimum wage may exceed the equilibrium wage of unskilled workers, especially teenagers.
Studies: a 10% increase in minimum wage reduces teen unemployment by 1-3%
But, the minimum wage cannot explain the majority of the natural rate of unemployment, as most workers’ wages are well abovethe minimum wage.
2. Labor unions
Unions exercise monopoly power to secure higher wages for their members.
When the union wage exceeds the equilibrium wage, unemployment results.
Insiders: Employed union workers whose interest is to keep wages high.
Outsiders: Unemployed non-union workers who prefer equilibrium wages, so there would beenough jobs for them.
108,073 Private sector (total)
21,305 Government (total)
15,184 Health care
3,657 Education
11,967 Professional services
6,536 Finance, insurance
4,639 Transportation
14,987 Retail trade
15,131 Manufacturing
776 Mining
123.2 120.5
116.0 117.1 97.4 88.7 126.3 106.6 108.6 102.1 151.8 7.6%
36.8
8.0 13.8 2.1 1.3 21.3 5.2 11.4 6.9 15.6 7,652
Construction
wage ratio U % of total
# employed (1000s) industry
wage ratio = 100×(union wage)/(nonunion wage) slide 26
Union membership and w age ratios by industry, 2008
3. Efficiency w age theory
Theories in which higher wages increase worker productivity by:
attracting higher quality job applicants
increasing worker effort, reducing “shirking”
reducing turnover, which is costly to firms
improving health of workers (in developing countries)
Firms willingly pay above-equilibrium wages to raise productivity.
Result: structural unemployment.NOW YOU TRY:
Question for Discussion
Use the material we’ve just covered to come
up with a policy or policies
to try to reduce the natural rate of
unemployment.
Note whether your policy targets frictional or
structural unemployment.
The duration of U.S. unemployment,
average, January 1960 – June 2009
time spent unemployed by this group (% of time spent
unemployed by all groups)
# of unemployed persons in group
(% of all unemployed
persons)
# of weeks unemployed
1-4 42% 8.1%
5-14 30% 21.5%
15 or more 27% 70.4%
30
The duration of unemployment
The data:
More spells of unemployment are short-term than medium-term or long-term.
Yet, most of the total time spent unemployed is attributable to the long-term unemployed.
This long-term unemployment is probablystructural and/or due to sectoral shifts among vastly different industries.
Knowing this is important because it can help us craft policies that are more likely to work.TREND: The natural rate rises over 1960-84, then falls over 1985-2005
Percent of labor force
EXPLAI NI NG THE TREND:
The minimum w age
Dollars per hour
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
minimum wage in current dollars
minimum wage in 2009 dollars
The real minimum wage and natural u-rate have similar trends.
The real minimum wage and natural u-rate have similar trends.
EXPLAI NI NG THE TREND:
Union membership
Since early 1980s, the natural rate and union membership have both fallen. But, from 1950s to about 1980, the natural rate rose while union membership fell. Since early 1980s, the natural rate and union membership have both fallen. But, from 1950s to about 1980, the natural rate rose while union membership fell. Union membership
selected years
year percent of labor force
1930 12%
1945 35%
1954 35%
1970 27%
1983 20.1%
2008 12.4%
EXPLAI NI NG THE TREND:
Sectoral shifts
1970-1986: volatile oil prices create jarring sectoral shifts
1970-1986: volatile oil prices create jarring sectoral shifts
1986-2005: oil prices less volatile, so fewer sectoral shifts
1986-2005: oil prices less volatile, so fewer sectoral shifts
2006-present:
oil price volatility increases – will the natural u-rate rise again? 2006-present:
oil price volatility increases – will the natural u-rate rise again?
Price per barrel of oil,
in 2009 dollars
EXPLAI NI NG THE TREND:
Demographics
1970s:The Baby Boomers were young.
Young workers change jobs more frequently (high value of s).
Late 1980s through today:Baby Boomers aged. Middle-aged workers change jobs less often (low s).
U n e m p lo y m e n t in E u ro p e ,
1960-2008Percent of labor force
Why unemployment rose in Europe
but not the U.S.
Shock
Technological progress has shifted labor demand from unskilled to skilled workers in recent decades. Effect in United States
An increase in the “skill premium” – the wage gap between skilled and unskilled workers.
Effect in Europe
Higher unemployment, due to generous govt
benefits for unemployed workers and strong union presence.
Percent of w orkers covered by collective bargaining, selected countries
United States 18% United Kingdom 47
Switzerland 53
Spain 68
Sweden 83
Germany 90
France 92
Austria 98
Chapter Summary
Chapter Summary
1. The natural rate of unemployment
definition: the long-run average or “steady state” rate of unemployment
depends on the rates of job separation and job finding
2. Frictional unemployment
due to the time it takes to match workers with jobs
may be increased by unemployment insurance
Chapter Summary
Chapter Summary
3. Structural unemployment
results from wage rigidity: the real wage remains above the equilibrium level
caused by: minimum wage, unions, efficiency wages
4. Duration of unemployment
most spells are short term
but most weeks of unemployment are
attributable to a small number of long-term unemployed persons
Chapter Summary
Chapter Summary
5. Behavior of the natural rate in the U.S.
rose from 1960 to early 1980s, then fell
possible explanations:
trends in real minimum wage,
union membership, prevalence of sectoral shifts, and aging of the Baby Boomers
Chapter Summary
Chapter Summary
6. European unemployment
has risen sharply since 1970
probably due to generous unemployment benefits, strong union presence, and a
technology-driven shift in demand away from unskilled workers
